Income Tax Calculator 2026-27

Understanding Australia's Progressive Income Tax System

Australia's income tax system is built on the principle of progressivity: the more you earn, the higher the proportion of your income you pay in tax. The system achieves this through a series of tax brackets, where each bracket applies a specific rate to only the income that falls within its range. This means that earning more money never results in you taking home less, a common misconception that leads some workers to turn down overtime or pay rises in the mistaken belief that they will be worse off.

The progressive structure has been a feature of Australia's federal income tax since its introduction in 1915. Over the decades, the number of brackets, the rates, and the thresholds have been adjusted many times to reflect changing economic conditions, government fiscal priorities, and social policy goals. The most recent significant reform, the revised Stage 3 tax cuts effective from 1 July 2024, reduced the number of effective rate tiers and lowered rates for low and middle income earners, while still maintaining the progressive principle through the top bracket rates.

When we say Australia has a "progressive" tax system, we mean that your marginal tax rate (the rate on the next dollar you earn) increases as your income rises, but your effective tax rate (the average rate across all your income) is always lower than your marginal rate. For a resident earning $100 000, the marginal rate is 30% (since the $100 000th dollar falls in the $45 001 to $135 000 bracket), but the effective rate is approximately 20.1% because the first $18 200 was tax-free, the next $26 800 was taxed at only 16%, and only $55 000 was taxed at 30%.

2025-26 Resident Tax Brackets

The following brackets apply to all Australian residents for tax purposes during the 2025-26 financial year (1 July 2025 to 30 June 2026). These brackets are unchanged from 2024-25, as the revised Stage 3 cuts took effect from 1 July 2024 and no further changes have been legislated.

What Changed with the Stage 3 Tax Cuts

The revised Stage 3 tax cuts, effective from 1 July 2024 and continuing into 2025-26, represent a comprehensive restructuring of Australia's income tax brackets. The original Stage 3 plan, legislated by the Morrison government in 2019, proposed collapsing the 32.5% and 37% brackets into a single 30% bracket spanning $45 001 to $200 000. This would have primarily benefited higher-income earners while providing no relief to workers earning below $45 000.

The Albanese government's revised version, announced in January 2024, took a different approach. It reduced the second bracket rate from 19% to 16%, providing direct tax relief to every worker earning above $18 200. It maintained the 30% rate but set the bracket ceiling at $135 000 rather than $200 000. The 37% bracket was retained but shifted to cover $135 001 to $190 000, and the top rate of 45% was adjusted to apply from $190 001 rather than $180 001.

The practical result is that every Australian taxpayer receives a tax cut, but the distribution of benefits is more equitable. A worker earning $40 000 saves $654 per year (entirely from the rate reduction from 19% to 16%), while a worker earning $200 000 saves $4 329 per year. The original plan would have given the $40 000 earner nothing and the $200 000 earner $9 075. The revised cuts also preserve more revenue for government services, with the total fiscal cost estimated at $23 billion per year compared to $30 billion for the original plan.

Tax Savings Comparison: Pre-Stage 3 vs 2025-26

Tax amounts are before LITO is applied. Medicare Levy is not included. 2023-24 uses the 19%, 32.5%, 37%, and 45% brackets.

Low Income Tax Offset (LITO) in Detail

The Low Income Tax Offset is a non-refundable tax offset that reduces the income tax payable by lower-income residents. For 2025-26, LITO operates across three tiers. If your taxable income is $37 500 or less, you receive the full $700 offset. Between $37 500 and $45 000, the offset reduces by 5 cents for every dollar above $37 500, bringing it down to $325 at $45 000. Between $45 000 and $66 667, the offset further reduces by 1.5 cents per dollar, reaching zero at $66 668.

LITO effectively raises the tax-free threshold for low-income workers. With the full $700 LITO applied, a worker earning $21 884 or less pays zero income tax (the $700 LITO fully offsets the tax of $589 on income between $18 200 and $21 884). This means the effective tax-free threshold for a resident claiming LITO is $21 884, not $18 200.

Because LITO is non-refundable, it can reduce your tax to zero but cannot produce a refund on its own. It is automatically applied by the ATO when you lodge your tax return and is also factored into the PAYG withholding tables your employer uses, so you receive the benefit in every pay period rather than as a lump sum at tax time. You do not need to take any action to claim LITO; it is applied based solely on your taxable income.

Non-Resident Tax Brackets 2025-26

Individuals who are foreign residents for Australian tax purposes face a different bracket structure. They do not receive the $18 200 tax-free threshold, meaning they pay tax from the very first dollar earned. They are also ineligible for LITO and do not pay the Medicare Levy (since they are not entitled to Medicare benefits).

At lower income levels, non-residents pay substantially more tax than residents. A non-resident earning $60 000 pays $18 000 in income tax (30% flat), compared to $8 788 for a resident (after LITO). At $80 000, the non-resident pays $24 000 versus the resident's $14 788. The gap narrows at very high incomes, and when you factor in the resident's 2% Medicare Levy, the crossover point where a non-resident pays less total tax than a resident occurs at extremely high income levels (above approximately $500 000).

Working Holiday Maker Tax Rates

Working Holiday Makers (WHMs) on subclass 417 and 462 visas have their own tax schedule, introduced in 2017 as part of the "backpacker tax" reforms. WHMs pay a flat 15% on the first $45 000 of income, then standard non-resident rates above that: 30% from $45 001 to $135 000, 37% from $135 001 to $190 000, and 45% above $190 000.

The 15% flat rate was a compromise between the original 32.5% rate proposed and industry lobbying for a lower rate to maintain Australia's attractiveness as a working holiday destination, particularly for agricultural and hospitality workers. At $30 000 in earnings (typical for a one-year working holiday), the WHM tax is $4 500, compared to $1 288 for a resident (after LITO) and $9 000 for a standard non-resident. WHMs do not pay the Medicare Levy and are not eligible for LITO.

Marginal vs Effective Tax Rates Explained

Understanding the difference between marginal and effective tax rates is one of the most important concepts in Australian personal finance. Your marginal tax rate is the rate applied to the last dollar of your income, while your effective rate is the total tax paid divided by your total income. They serve different purposes in financial decision-making.

Use your marginal rate when evaluating the tax impact of additional income, such as a bonus, overtime, or a pay rise. If your salary is $90 000, your marginal rate is 32% (30% income tax plus 2% Medicare Levy). An additional $5 000 in overtime will be taxed at approximately 32%, leaving you with $3 400 after tax. Use your effective rate when budgeting or calculating your overall tax burden. At $90 000, your effective rate is approximately 19.5% (income tax plus Medicare Levy combined), meaning you take home about 80.5% of your gross income overall.

The common misconception that "a pay rise pushes all your income into a higher bracket" arises from confusing marginal and effective rates. When your salary increases from $134 000 to $136 000, only the $1 000 above $135 000 is taxed at the new 37% rate. The first $135 000 continues to be taxed exactly as before. Your effective rate rises marginally from approximately 23.8% to approximately 23.9%, and your total after-tax income increases by approximately $630 of the $2 000 pay rise.

Effective Tax Rates for Common Salaries

Effective rates include LITO where applicable. Medicare Levy (2%) is not included in these figures. To calculate total effective rate including Medicare, add 2 percentage points for incomes above $32 500.

Legitimate Strategies to Reduce Your Income Tax

The Australian tax system provides several legitimate mechanisms to reduce your taxable income and, consequently, the amount of income tax you pay. These strategies work within the existing rules and are explicitly designed by the government to encourage certain behaviours, such as saving for retirement, investing in education, or supporting charities.

• Concessional super contributions: Salary sacrificing into super reduces your taxable income by the amount sacrificed. Contributions are taxed at 15% inside the super fund instead of your marginal rate. For a worker on $120 000, sacrificing $15 000 into super saves approximately $2 550 in income tax (the difference between 32% marginal rate and 15% super tax). The concessional cap is $30 000 per year, including employer SG contributions. Division 293 tax adds an extra 15% if income plus concessional contributions exceeds $250 000.
• Work-related deductions: Any expense directly related to earning your income can be claimed as a deduction on your tax return. Common deductions include tools and equipment, work uniforms (not everyday clothing), self-education expenses for improving skills in your current role, home office expenses (67 cents per hour under the revised fixed-rate method), professional memberships, union fees, and travel between work sites. Each deduction reduces your taxable income by the amount claimed, saving you tax at your marginal rate.
• Negative gearing: If you own an investment property where the costs (interest, maintenance, insurance, rates, depreciation) exceed the rental income, the net loss can be offset against your salary income. For a worker on $100 000 with a $10 000 net rental loss, the taxable income drops to $90 000, saving approximately $3 200 in tax. This strategy carries investment risk and is only beneficial if the property appreciates in value over time.
• Charitable donations: Donations of $2 or more to registered deductible gift recipients are fully deductible. A $2 000 donation at a 30% marginal rate saves $600 in tax. While you still spend $1 400 net, the tax benefit makes charitable giving more affordable.
• Private health insurance: Taking out hospital cover can eliminate the Medicare Levy Surcharge if you earn above $93 000 (single), saving up to 1.5% of income. At $150 000, the MLS would be $2 250 without hospital cover, compared to a basic hospital policy costing approximately $1 200 to $1 500.

Common Tax Misconceptions Debunked

• "Earning more puts me in a higher bracket, so I will take home less." This is categorically false. Only the income above each bracket threshold is taxed at the higher rate. A pay rise always increases your after-tax income. The marginal rate on the extra income may be higher, but you still keep a majority of every additional dollar.
• "Overtime is not worth it because of the tax." Overtime is taxed at your marginal rate, which is always less than 100%. At a 30% marginal rate (plus 2% Medicare Levy), you keep 68 cents of every overtime dollar. If overtime is paid at time-and-a-half ($60/hour vs base $40/hour), your after-tax overtime rate is $40.80, compared to your base after-tax rate of $27.20. Overtime is always financially worthwhile.
• "The tax-free threshold means I pay no tax on $18 200." This is partially true. If your only income is $18 200, you pay no tax. But the tax-free threshold is effectively a zero-rate bracket within the progressive system. Once you earn above $18 200, tax applies to every dollar above that amount, not to your entire income. With LITO, the effective tax-free threshold is actually $21 884 for residents.
• "I can claim anything work-related as a deduction." Deductions must satisfy three tests: the expense must be directly connected to earning your income, it must not be a private or capital expense, and you must have records to substantiate the claim. General expenses like your daily commute, regular clothing, and lunches are not deductible even if you incur them because of work.

Sources

• ATO: Individual income tax rates for Australian residents 2025-26
• ATO: Tax rates for foreign residents
• ATO: Tax rates for working holiday makers